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Compulsory budgeting to be introduced to Vietnamese construction contracts from February

Out-Law News | 06 Jan 2014 | 3:04 pm | 2 min. read

Public works contractors in Vietnam will be prohibited from signing construction contracts without agreeing "suitable budgetary provision" beforehand under new rules published by the country's government.

The change is one of several amendments to rules on pricing and payment which will be made to the Vietnamese Construction Contract Regulations from 1 February. Decree 207/2013, finalised at the end of last year, will amend and supplement a number of provisions in the existing Decree 48/2010 concerning public works construction contracts.

In Vietnam, public works contracts are those to which the state contributes a minimum of 30% to the relevant construction project. Hong Kong-based construction law expert Nicholas Brown of Pinsent Masons, the law firm behind Out-Law.com, said that although it was "tempting" to assume that the changes would not pose serious concerns for foreign contractors involved in public works, there was "ample reason for further appropriate enquiries to be made before commitments are made in the public works sector".

"In customary legislative fashion, the new provisions are vague and incomplete and would certainly be inadequate were they intended to create private law obligations," he said.

"The novel exception to price adjustment based on advanced payment, in particular, poses a serious challenge to risk evaluation in a case where one is considering entry into a remeasurement contract in conjunction with advance payment within the public works sector," he said.

The new decree will introduce a new Clause 6 into the existing Article 15 of the Construction Contract Regulations which will require contractors to include 'risk factors' relating to the price of the project falling in the contract price for lump sum and fixed unit-price contracts. Contracting parties will also be required to "take responsibility for risks related to the contract price" in those contracts.

Parties will also be prevented from adjusting any unit price corresponding to work for which there has been an advanced payment once the changes come into force. These changes are being introduced on top of existing rules which generally prevent changes from being made to the price of lump sum or fixed unit-price contracts, but which allow parties to provide for price adjustments in specific cases elsewhere in the contract.

The new decree will also add to the rules governing advance payment guarantees (APGs) set out in the Construction Contract Regulations. In particular, it will extend the validity period of an APG until such time as the advance payment is fully accounted for. The rules governing how advanced payments are allocated to different members of a contracting consortium will be relaxed slightly to allow the consortium leader to provide a guarantee for the full sum of the advance payment.

Brown said that the new requirements would have implications for the drafting of APGs that would previously have been given fixed expiry dates, and so was "a matter of immediate concern for commercial banks that are involved in public works construction contracts in Vietnam".

"It will be hoped that the existing practice of substituting fresh replacement guarantees would be viewed as still satisfactory," he said.

The new rules on compulsory project budgets will only allow a construction contract to be signed when "the principal has set up a capital plan to pay the contractor according to the payment progress of the contractor", according to the decree. However, Brown said that the new clause did not specify how that budget must be set up and what would happen if it was not; and did not create and new remedies for delayed payment in circumstances where a suitable budget was not agreed before the contract was signed.